The Prospect of Economic Cooperation in Northeast Asia


Paper presented at the Northeast Asia Economic forum, held in Tianjin, China, September 2-7, 1991


Northeast Asia in the World Economy

It is often said that Europe, North America, and East Asia or Northeast Asia in particular will constitute the three pillars of the world economy in the 1990s and beyond. No doubt, the future course of development of the world economy will be conditioned largely by the economic performance of these three economic centers, which would in turn shape the regional economic power balance in the global economic order. In a sense, the three are and will be competing with each other for economic preeminence, and this competitive relationship underlies the current trend in the major economic centers toward greater regional economic integration and cooperation.

The economic integration of the EC is moving at a rapid pace, and that movement is now being extended to EFTA and the Eastern European countries currently undergoing market-oriented economic reforms. This regional integration is aimed at removing or reducing internal barriers impeding the free flow of people, goods, services, technology, and ideas across national frontiers. This trend will no doubt bring about more investment, more output, more trade, and higher income for the people of the region as a whole. Externally, it would greatly enhance the role and capacity of a united Europe to influence the world¡¯s economic and political affairs.

Regional integration in Europe, particularly in the EC, will be beneficial to the Asia-Pacific in so far as it will provide added trade and investment opportunities to Asians, thereby contributing to the growth and development of the Asia-Pacific economies. However, if Europe were to turn significantly inward and maintain or increase the level of trade protection against outsiders, it would place East Asia at a competitive disadvantage. Improved efficiency within the EC alone will make its products more competitive relative to imported goods from Asia, and this will tend to dampen prospects for trade with Asia. Since trade flows between Asia and the EC represent a much larger share of Asia's than of the EC's total trade, it is likely that Asia will be placed in a much weaker bargaining position with respect to trade negotiations and other international economic matters.

North America has also been moving toward greater regional economic integration. Following the U.S.-Canada Free Trade Agreement in 1989, the U.S. is now approaching Mexico about creating a free trade area. Geo-politically, North America faces the Atlantic and Europe as well as the Pacific and Asia.

However, the relative economic strength of the U.S. position is diminishing on both sides. Until the mid-1980s, for example, the U.S. had been the major source of capital, investment and technology for all market economies in the Asia-Pacific, making a significant contribution to their economic development. But that role is now being assumed by Japan, which has risen to the status of an economic superpower in the world second only to the United States. Although the U.S. is still the single largest export market for most of the Northeast Asian countries, their dependence on the U.S. market has been declining as a result of increasing trade among themselves combined with the mounting protectionist trade barriers in the United States against imports from the Asian economies, particularly since the mid-1980s. Amid its growing trade deficits and trade frictions with Asian countries, the U.S. has been groping for a new strategy for Asia to protect its own economic interests and meet the challenge of the coming ¡°Pacific Century.¡±

The Northeast Asian pillar of the world economy is relatively weak, beset with many difficulties in spite of its tremendous potential for economic growth and development. Northeast Asia as a whole constitutes the largest economic zone in the world in terms of population, natural resources, and potential market size as well as its vast trade and investment opportunities. To be sure, Northeast Asia, as defined to include China, Japan, North and South Korea, the Soviet Far East, Mongolia, Taiwan, and Hong Kong, has been and still is one of the most dynamic areas of the world economy mainly due to the phenomenal economic growth of the region's market economies, and, more recently, also that of China. Yet, the region as a whole accounts for only about 15% of the world's trade today. Intra-regional trade in Northeast Asia has been increasing rapidly in recent years, but remains relatively modest compared with the volume of Northeast Asian trade with countries outside the region such as the EC and North America. No country in the Northeast Asia ships more than 30% of its total exports to countries in its own region, except for the special case of trade between China and Hong Kong.

Political Obstacles

What is particularly unfortunate for this region is that economic development has been hampered by numerous political obstacles. They include, as we all know, territorial division and continuing stalemate between North and South Korea, Japanese- Soviet territorial disputes, uncertain PRC-Taiwan relations, the use of sanctions against the PRC following the June 1989 Tiananmen incident, and the current political turmoil in the Soviet Union. It follows from this situation that the prospects for economic development in East Asia depend, more than anything else, on the extent to which these political barriers are reduced or removed.

Fortunately, however, we now see much brighter prospects for easing these political obstacles as the Cold War has come to an end. For example, South and North Korea have finally joined the United Nations, enhancing prospects for peace and rapprochement, including reunification of the Korean Peninsula as well as economic exchanges between the two Koreas. Pyongyang has also initiated talks with Japan for the long over-due normalization of relations between them, which would also promote increased economic exchanges between North Korea and the rest of the countries in the region. The recent visit of the Japanese Prime Minister to Beijing likewise augurs well for political and economic cooperation between the two countries. Moreover, the institutional transformation toward a market economy is making rapid progress in China and to some extent in the Soviet Union. The re is also growing realization that promotion of economic exchange and cooperation itself provides better opportunities for resolving political questions between the countries or areas concerned in the region. These salutary developments present a new vista for closer and more wide-ranging economic cooperation among the economies in Northeast Asia. It behooves all countries in the region to seize this opportunity to create a new order of economic cooperation in Northeast Asia on the basis of mutual respect and reconciliation.

Toward Closer Economic Cooperation

There is much to be done multilaterally as well as bilaterally in our efforts to improve regional economic cooperation. What is needed most at the present time is to promote mutual understanding through dialogue and exchanges of information and views in order to better explore ways and means of promoting regional cooperation. This sort of intellectual exchange is essential, especially between the market and non-market economies for the obvious reason that the two sides have long been far apart and thus have relatively little knowledge of each other. From this perspective, I especially appreciate the value of this conference, which serves exactly the purpose I have just underscored.

Secondly, there is a great need for removing institutional barriers on the part of both market and non-market economies in the region. Although we have seen a rapid increase in recent years in economic exchanges between the two types of economy in the region, the fact remains that various institutional barriers on both sides are impeding further expansion of trade and investment between them. We anticipate, of course, that these barriers will either be lowered or removed as the economic reforms in China, the Soviet Union and others make progress. We also realize how formidable a task it is to transform a long entrenched planned economy into a market economy. Certainly, the job cannot be done overnight, and the transformation process requires patience and cooperation on the part of the market economies, which can make their experience and resources available to the reforming countries.

Thirdly, economic exchange presupposes the existence of means of communication and transportation. However, the reality is that inadequate provision of this means is one of the most serious barriers limiting not only domestic exploration of natural resources distributed widely throughout the vast territory of China and the Soviet Far East, but also flows of people, goods, and services among countries in the region. It is an urgent requirement for all countries in the region to establish a modern network of marine and air transportation as well as electronic communications systems. It is encouraging to note in this regard that a great emphasis is placed on the development of transportation-communications systems in the Chinese government's 8th Five Year Development Plan for the period 1991-1995. This approach certainly deserves support from developed countries and international financial organizations. It is also gratifying to note a case of regional cooperation in which a sea route connecting Pusan and Inchon in Korea and Tianjin, Dalian and Shanghai in China was opened last year by a joint venture company of the two countries. No doubt it is small but highly significant beginning, and I am personally hoping that it becomes possible in the near future for all of us to fly directly from Seoul to Beijing or vice versa without detouring to Tokyo or Hong Kong. Let me stress once again that the presence of well developed means of communication and transportation is one of the greatest stimulants to the growth of business, industry, commerce etc., both domestically and internationally.

Fourthly, I would argue that Japan should play a more positive role in regional economic cooperation, for the obvious reason that Japan is one of the three pillars of the global economy with far-flung interests and responsibilities. But history, geography, and opportunity dictate that the economic responsibilities with the greatest claim upon Japan's resources are those closest to home, i.e., regional. For example, Japan can put more of its surplus funds originating from the Asian trade into development projects in Northeast Asia, including China, the Soviet Far East, Mongolia and North Korea instead of diverting them to unproductive investments elsewhere. An even better way of assisting neighboring countries would be for Japan to reduce such surpluses by importing more industrial goods from them so that those countries could pursue a more self reliant path in their economic development. In order for this to happen, it would be necessary for Japan to disseminate her technology and know how to the deficit countries so as to enable them to produce goods that are exportable to Japan. This would, in turn, call for industrial adjustment on the part of Japan in response to shifting patterns of comparative advantage vis-a-vis Asian developing countries. Japan could also share its vast experience of economic development under the market system with the reforming countries to assist them with their economic transformation. Japan has already been moving in this direction, making considerable contributions to the economic development of Asian countries in recent years. Yet, Japan can and should do much more to further regional development in Northeast Asia.

Fifthly, the Asian NIEs also have something to offer to regional development. Some financial resources, though modest, are currently finding their way from these countries to China and the Soviet Union within the limits set by their own capabilities and institutional constraints on the part of the reforming countries. In addition, the NIEs can provide middle-level technology suited for labor intensive production and processing. Their experience with development is no less, or even more, relevant to the policy problems involving the economic reforms under way in China and the virtual transformation of the Soviet system. They can also provide rapidly growing markets for primary resources and raw materials from China and the Soviet Union in return for manufactured products.

Finally, I have come to believe that we need, among other things, a multilateral institution to help implement those recommendation outlined above. I am not proposing creation of any new regional body similar to APEC, PECC, ASEAN, or the like. We already have enough regional groupings in the Asia-Pacific region which are mainly engaged in dialogue. What I am suggesting is a more practical proposal of creating a regional development bank for Northeast Asia which I aired last year at a meeting very similar to the current one dedicated to regional cooperation in Northeast Asia. The character of the bank proposed should be modeled after the ADB with equity participation of countries not only in Northeast Asia but any other countries outside of the region that wish to participate.

My proposal was based on the following considerations. First, it would facilitate financial flows from Japan, the Asian NIEs, and hopefully from other sources outside the region, to developing countries in our region. A merit of the bank proposed is that it would make international cooperation and coordination easier and more effective. At the same time, it would make Japan less vulnerable to the charge that it is seeking economic hegemony in Northeast Asia than would be the case if Japan concentrated on bilateral dealing with the countries of the region. Second, the bank could serve as a brokerage house, arranging exchanges of information as well as consultations in which many cooperative issues could be addressed. For example, the members of the governing body of the Bank could meet regularly and discuss the easing of institutional barriers, which is especially urgent and  vital in advancing regional economic cooperation. Finally, the bank could also act as a catalyst, disseminating knowledge of basic elements of the market system, such as trade practices, the banking system, business organization, accounting, etc. This would assist integration of non-market economies into the open international economic system for their own benefit. I am hoping that this proposal receives a serious consideration by political leaders of the countries in the region.

Before closing my remarks, a word of caution may be in order. These days regional economic groupings are in fashion almost everywhere, and regionalism seems to be gaining momentum, as I mentioned earlier. But if regionalism goes too far without regard to the global principles upheld by the UN and the GATT, we may fall into the same error of economic nationalism that contributed to the outbreak of the Second World War. We should guard against this pitfall, and thus avoid introducing discriminatory barriers against countries outside the region. By the same token, we should urge the tri-polar leaders of the world economy to uphold principles of globalism not only in words but also in deeds and, at the same time, to promote regional economic balance among the three centers of the world economy. History shows that lack of balance among major powers or regions weakens political and security relations and becomes a source of instability.


At any rate, East Asia is now at a crossroads. One road leads to the removal of political impediments to economic development and, eventually, the full realization of the region's growth potential. The other road is that of continuing political and economic disunity and growing disparity between Northeast Asia, on the one hand, and Europe and North America, on the other, in terms of production, living standards, and global influence. In conclusion, what I have tried to show is that there are four major factors that will determine the future course of economic development in Northeast Asia and its place in the world economy: the first and most important is reduction or removal of political obstacles in the way of economic exchanges among countries in the region; the second is the progress of economic reforms in China, the Soviet Union and other countries; third, developing transportation-communications systems for both domestic development and for expansion of economic exchanges and cooperation among countries in the region; and fourth, the preeminent role of Japan and the auxiliary role of the Asian financial institution for more effective economic cooperation in the region. (September 2, 1991)